Apple vs. Microsoft Business Model: What's the Difference?

Apple Business Model vs. Microsoft Business Model: An Overview

More than any other American companies, Apple, Inc. (NASDAQ: AAPL) and Microsoft Corporation (NASDAQ: MSFT) dominate the intersection of technology and consumer access. Even though they compete across a huge range of sub-industries, such as computing software, hardware, operating systems, mobile devices, advertising, applications, and web browsing, each firm takes a different approach from an organizational and philosophical perspective.

As of Jan. 2022, AAPL had a market cap of around $2.61 trillion. Microsoft briefly edged out Apple as the largest company in the world riding on the strength in the growth of its cloud computing business, but MSFT has now fallen to second at $2.17 trillion.

The Apple Business Model

It is difficult to recall a modern American business so thoroughly dominated by the ideas and personality of one individual as Apple was under the tutelage of Steve Jobs. Jobs' remarkable innovations propelled Apple to unprecedented heights until his passing from cancer in 2011.

During Steve Jobs' second reign—he was fired in 1985, returning in 1997—Apple returned to relevancy and revolutionized multiple subindustries. In 2001, the company released the iPod, a pocket-sized device that could hold 1,000 songs, and it soon took over the Sony Walkman. A few years later, Apple completely redefined mobile phones when the iPhone was released in 2007.

Apple easily bests its competitors in terms of hardware sales and high-end gadgets. Thanks to the company's early 2000s reputation as a nonconformist response to Microsoft, millennials grew up using Macs in large numbers. This is buoyed by the company's brilliant insistence on integrating its products, making it easier to keep using new Apple products and thus more difficult to switch to a competitor's interface; this is sometimes referred to as the "Apple Ecosystem Lock."

The weakness in the Apple's business model lies in the historic success of the company's golden invention: the iPhone. Nearly half of all Apple revenue comes from iPhone sales, and no new, comparable innovation has taken off since its former CEO died and was replaced by Tim Cook. However, Cook has done a good job of preserving Jobs' legacy and has propelled Apple stock to all-time highs.

The Microsoft Business Model

For years, Microsoft dominated the computer industry with its Windows software; Apple was an afterthought for more than a generation of operating products. Before Google Web browsing began to dominate the market, Microsoft gave away Internet Explorer for free, driving Netscape and other similar companies out of business.

The Microsoft revenue model historically relied on just a few key strengths. The first, and most important, is the licensing fees charged for use of the Windows operating system and the Microsoft Office suite. After a few years of increasing irrelevance in the race against Google and Apple, Microsoft unveiled a new vision in April 2014, instantly shifting focus to make Windows software more compatible with competitor products, such as the iPad. Microsoft also has a few successful products, highlighted by the Microsoft Surface and Surface Pro, that battle Apple devices such as the iPad.

Moving forward, however, Microsoft realized that paid software is a more difficult sell in an age of low-cost alternatives. Additionally, tablets and phones are replacing PCs. A newer Microsoft business model has been telegraphed by CEO Satya Nadella, one that emphasizes product integration, a "freemium" software package, and a concentration on its cloud computing business.

For example, Microsoft wants customers to be more engaged and fixated on its products.

Special Consideration: Google's Business Model

Unsurprisingly, the heart and soul of the Google revenue stream is its search engine and web advertisements. While Google is not the only company to give away free services and bundle them with other goods, few do it as well or as successfully.

Google services did not originally cost the user anything. Google would lure in users and collect their data, and then sell access to eager buyers across the planet. Every marketing firm in the world wants the kind of information and repeat usage Google enjoys. Moreover, the company keeps getting better and more sophisticated at targeting consumers and businesses, syncing preferences and playing economic matchmaker. In recent years, some fees have been added for storage and other services.

This no-fee model is not just profitable, it is very disruptive to Apple and especially to Microsoft. While Apple and Microsoft keep competing to find better and more innovative products to charge consumers, Google is all too happy to find a way to monetize activities for which users are eager to stop paying.

Google does not charge for Android in the U.S., which is one of the chief reasons manufacturers are so drawn to it. The Google Web apps, which bear a striking resemblance to Microsoft Office programs, are also free. Since Google began offering a free operating system and computer software, sales for Microsoft Windows and Office have slowed.